Five years from now, a significant portion of the nation’s telephone traffic could be carried via the Internet instead of over traditional wires, and that could mean big things for Mediacom Communications Corp.

Greater Des Moines represents the largest market for the Middletown, N.Y.-based cable provider, and the company is likely to use Des Moines as a test market when it launches its so-called Voice-Over-Internet-Protocol service this summer.

The company believes it could snatch as much as half of the current telephone market from such dominant local providers as Qwest Communications International Inc. by offering cut-rate prices. That may not be an unrealistic projection, given that 20 percent of U.S. homes already have the broadband access needed to make calls over the Internet wth the same quality they’re used to. Within five years, VOIP technology could account for 40 percent of the residential telephone market, according to the New Millennium Research Council, a Washington, D.C., think tank.

“Personally, I’d like to have half the residential (telephone) market and half the business market,” in five years, said Charlie King, vice president of Mediacom’s Des Moines-based North Central Division, which encompasses Iowa, Minnesota, South Dakota and Wisconsin.

About 600,000 of Mediacom’s 1.55 million cable subscribers live in Iowa. Within its short three-year tenure as a cable service provider in the state, the company says it has invested $250 million here to upgrade to a fiber-optic network, and has added 175 more employees to improve service and create a more local service corps. It now has more than 1,100 employees in Iowa.

Founded in 1995 by cable veteran Rocco Commisso, Mediacom became the state’s dominant cable company when it bought AT&T Broadband’s Iowa cable systems in July 2001.

The company already offers high-speed Internet and video services. By further diversifying its products into voice, Mediacom believes it can counter a growing threat from direct-satellite-broadcast companies and other competitors, which are eating into cable operators’ market share and profits.

Over the past four years, the total number of U.S. cable subscribers declined to about 70.5 million, the same level as at the end of 1999. At the same time, the number of non-cable subscribers has more than doubled, from 11.23 million in June 1998 to 23.7 million in June 1993, according to a recent report published by the Federal Communications Commission.

Mediacom, whose shares are traded on the Nasdaq Stock Market under the symbol MCCC, in October was named to the 2003 Deloitte Technology Fast 500, a list of the 500 fastest-growing technology companies in North America. Between 1998 and 2002, Mediacom’s revenue grew sevenfold.

The company’s has also recently seen a turnaround in earnings. It posted a third-quarter profit of $1.9 million, compared with a loss of $39.9 million in the third quarter of 2002. The company expects to report its fourth-quarter results on Feb. 24. Perhaps more important to investors, the company had its first free cash flow in the third quarter.

Within its first 18 months of operation in Iowa, the company completed a $250 million upgrade to its in-state network, part of a companywide $1 billion investment in system upgrades and capital expenditures.      “He (Commisso) invested in and upgraded every one of these communities and built a hybrid fiber-optic network from which every one of these new services can be launched,” King said.

By upgrading to fiber-optic technology, which can carry signals up to 50 miles before requiring a signal boost, the company was able to reduce the number of amplifying “nodes” from more than 200 across the state to about eight. That’s improved service and made the company’s Iowa network cheaper to operate.

“So now when you want to add a channel, you only need to add eight pieces of equipment, not 200,” King said.

Mediacom’s investments and broadening product line are typical of cable operators throughout the country, said Laura Behrens, a senior analyst with Gartner Inc., a research and advisory firm based in Stamford, Conn.      “All the millions that the cable operators have spent in the ’90s and into this decade were designed to allow this to happen,” Behrens said. “It’s commonly known as the triple play – voice, video and data.”   With the upgrade to fiber-optic networks, cable operators were able to immediately offer high-speed Internet access, and are now rolling out Voice-Over-IP, she said.

“It is still a nascent technology, and there is still a question of how it will be regulated,” Behrens said. With a prevailing view by the FCC commissioners that a growing industry shouldn’t be stifled, “there is likely to be some regulation, but it’s not likely to be the thicket that is the telephony market now,” she said.

Because Greater Des Moines is Mediacom’s single-largest market, the company often uses it to test new products. Last year, it introduced video on demand, which allows subscribers to order movies, sports programs, concerts or other special events onscreen and have them delivered instantly. Response to the product locally was about double what the company had projected, King said.   “(Video on demand) is a very fast-growing segment of our business because of the convenience it offers people,” he said.

Also in Des Moines, Mediacom last year introduced a high-definition TV converter box, and it currently offers HDTV programming from local CBS affiliate KCCI TV-8 and from the HBO and Showtime pay-cable services. It’s now testing a digital video recorder capable of recording up to 60 hours of programming that operates much like the popular recording devices marketed by TiVo Inc.

Mediacom entered the business Voice-Over-IP market in November, when it introduced Commercial Enterprise Solutions, which allows companies to get voice and high-speed Internet over one connection. Initial response has been slow, King said, in part because many companies are locked into contracts with their current telephone companies. However, Mediacom is now negotiating with one of the largest manufacturers in Iowa as a potential customer, he said.

When it comes to offering residential telephone service, one potential drawback to VOIP is the lack of a backup power supply to the phones, meaning customers will lose phone service if they experience a power outage. However, Mediacom is betting that many consumers have cell phones anyway, and that the service’s lower price will overcome any fears.

The company isn’t releasing pricing information yet, King said. “Let’s just say it will be extremely competitive,” he said. “We are very optimistic we are going to be able to show customers significant savings.”

Though Mediacom intends to begin offering telephone service via the Internet this summer, officials won’t say whether Des Moines will be among the first markets where it plans to introduce the service. The company is proceeding cautiously, he said.

“We want to make sure we do this right,” King said. “We have seen where it has been rolled out and companies have been overwhelmed with orders.”

FURTHER CONSOLIDATION LIKELY AMONG CABLE OPERATORS

Last week’s takeover bid by Comcast Corp., the largest U.S. television cable operator, for The Walt Disney Co. reflects a desire by cable companies to meld their distribution capabilities with content providers such as Disney to gain better access and pricing for the programming they offer.

The majority of cable programming content is controlled by a handful of large companies, which cable operators say drives up their costs and forces them to pass price increases along to their customers as rate increases.

“It is a huge problem, and it’s one that our company has taken a leadership role in,” said Charlie King, division vice president for Iowa’s dominant cable provider, Mediacom Communications Corp. in Des Moines. King said just a half-dozen companies, among them Viacom International Inc., General Electric Co. and Fox Home Entertainment, control 72 percent of the programming content on cable.

“The costs of programming are staggering,” he said. “Fox goes up 20 percent per year.”

For the past two years, King said, “our CEO has challenged the (programming) industry, saying, ‘I won’t raise my rates if you won’t raise yours.’ … Nobody’s taken us up on it.”

In 2001, pressure from Comcast’s chief executive, Brian Roberts, resulted in AT&T putting its cable operations up for sale, which included the cable systems that Mediacom bought in Iowa.

Now, as the eighth largest U.S. cable company, Mediacom itself is an attractive takeover target, said Laura Behrens, a senior analyst with Gartner Inc., the media research firm.

“Mediacom would certainly be one of the acquistion targets, based on the size of its subscriber base and the consolidation they’ve already had,” she said.

Todd Behrends, a Mediacom spokesman in Des Moines, declined to comment on the possibility of Mediacom being the object of any future takeover bid.

“It’s always been our policy to only comment on fact and not on speculation,” he said.